▫ Credit frictions and participation in over-the-counter markets

Journal of Economic Theory, September 2020
A study on the role of credit in OTC markets in the presence of endogenous payment and inventory capacity constraints.


This paper formalizes a Nash bargaining game between two players constrained by capacity decisions made prior to entering the negotiation. In equilibrium, strategic interactions drive capacity choices to zero and shut trade down despite the existence of gains from trade. The game is embedded in a general equilibrium model of decentralized asset trade with credit frictions to investigate the interaction between availability of credit and investors’ participation, modeled through their choices of inventory and payment capacity. A partial access to credit is sufficient to restore trade. The strategic interactions between payment capacity and inventory generate endogenous heterogeneity in holdings, trade sizes and prices, and complementarity between money and credit.

▫ Gradual bargaining in decentralized asset markets

Joint with Guillaume Rocheteau, Tai-Wei Hu and Younghwan In
Review of Economic Dynamics, October 2021
A novel approach to bargaining for models of OTC markets with unrestricted asset portfolios. It is based on the notion of agendas: portfolios can be partitioned and sold sequentially, one bundle at a time.

PDF Earlier WP: "Time to bargain and asset liquidity"

We introduce a new approach to bargaining, with strategic and axiomatic foundations, into models of decentralized asset markets. According to this approach, which encompasses the Nash (1950) solution as a special case, bilateral negotiations follow an agenda that partitions assets into bundles to be sold sequentially. We construct two alternating-offer games consistent with this approach and characterize their subgame perfect equilibria. We show the revenue of the asset owner is maximized when assets are sold one infinitesimal unit at a time. In a general equilibrium model with endogenous asset holdings, gradual bargaining reduces asset misallocation and prevents market breakdowns.

Working papers

▫ Complementary currencies and liquidity: The case of coca-base money

Joint with Cristian Frasser
In coca-growing villages of Colombia, where pesos are scarce, coca-base is not only used as the main input for cocaine production—it also acts as a complementary currency (CC), circulating locally as a medium of exchange for day-to-day transactions. This paper provides a clear rationale for the economically-motivated adoption of a CC in a small open economy underprovided with official currency. Equilibrium currency shortages arise endogenously in our model, whereby shocks to the local supply of currency have a real impact on local trade and welfare. We show how a CC can mitigate the underprovision of liquidity and derive general insights relating the CC’s characteristics to its ability to supplement the official currency. Additionally, we quantify the unintended consequences of various anti-narcotic policies pursued by the Colombian government on liquidity provision in coca-growing villages and identify the least-harmful policy tools given the policy objectives at stake.

▫ Central bank digital currency: Financial inclusion vs disintermediation

Joint with Jeremie Banet
We analyze and quantify the trade-off between providing broader access to digital payments and poaching deposits away from private banks that arises with the introduction of a CBDC.

PDF Poster

An OLG model where currency choices are endogenously driven by income heterogeneity is developed to analyze the simultaneous impact of a Central Bank Digital Currency (CBDC) on financial inclusion and bank funding. Pre-CBDC, wealthier agents use deposits while poorer agents use cash, remaining unbanked. CBDCs with higher fixed costs and interest rates are adopted by deposit holders and increase inclusion by raising deposit rates. CBDCs with lower fixed costs and interest rates are adopted by cash holders, directly increasing inclusion and inducing more favorable inclusion-intermediation trade-offs. A US calibration allows us to quantify these trade-offs conditional on CBDC design.

▫ Social engagement and the spread of infectious diseases

A random matching model of disease transmission based on SIS/SIR epidemiological models, with endogenous participation and precaution margins.


This paper endogenizes the spread of an infectious disease in a random matching model with pairwise meetings, where economic and social gains arise explicitly from person-to-person contacts. When agents can decide whether to engage in interactions, complementarities in the participation decisions of individuals susceptible to contracting the disease generate a large multiplicity of equilibria through adverse selection. The lower the participation of susceptible agents, the higher the prevalence of infection in the pool of participants, further discouraging the participation of susceptible agents. I document a variety of infection dynamics, including plateaus and multiple waves. Adverse selection leads to too much isolation from susceptible agents, and in the calibrated version of the model, the cost of forgone interactions offsets the welfare gains of flattening the curve and mitigating the human toll. When agents cannot opt out of the market but can instead choose whether to wear a mask, the equilibrium is unique. In the calibrated model the human toll is lower than when considering the participation margin, yet at a significantly smaller cost.

▫ Bargaining under liquidity constraints: Nash vs Kalai in the laboratory

Joint with John Duffy and Daniela Puzzello
Laboratory experiment with minimal structure seeking to identify how individuals bargain over two-dimensional terms of trade (prices and quantities) and how bargaining outcomes vary as a function of the buyer's payment capacity.

PDF Poster

We report on an experiment in which buyers and sellers engage in semi-structured bargaining along two dimensions: how much of a good the seller will produce and how much money the buyer will offer in exchange. Our aim is to evaluate the empirical relevance of two axiomatic bargaining solutions, the generalized Nash bargaining solution and Kalai’s proportional bargaining solution. These bargaining solutions predict different outcomes when buyers are constrained in their money holdings. We find strong evidence in support of the Kalai proportional solution and against the generalized Nash solution when buyers face liquidity constraints. Our findings have policy implications, e.g., for the welfare cost of inflation in search-theoretic models of money.

Work in progress

▫ The macroeconomics of labor, credit, and financial markets imperfections

Joint with Ioannis Kospentaris and Miroslav Gabrosvki
Corporate loans are one of the most important avenues of credit for firms. Whereas banks keep a fraction of these loans on their books, about half are sold on a secondary over-the-counter loan market. Empirically, the size of this market is substantial and spreads therein are tightly correlated with real macroeconomic outcomes. We develop a general equilibrium, search-theoretic model with labor, credit, and financial secondary loan markets to study their linkages and the macroeconomic impacts of imperfections in these markets. We show analytically that the existence of a loan market reduces the steady state level of unemployment but it amplifies its volatility, whereas introducing a loan servicing cost for banks raises steady state unemployment. Furthermore, convex loan servicing costs act as an automatic stabilizer. Numerically, we find that the existence of a secondary loan market reduces steady state unemployment by 2.7pp and amplifies the propagation of real and credit shocks in the economy. Financial shocks in the secondary loan market can have sizable effect on real variables.

Dormant papers

▫ Do financial frictions shift the Beveridge curve?

A study about the impact of corporate credit constraints on hiring and vacancy yields, and their potential to shift the Beveridge curve.

Poster Interactive Beveridge Curve (desktop only)

I propose the deterioration of credit availability as a novel explanation for the outwards shift of the Beveridge curve in the US following the Great Recession. The model implements a twist in Wasmer and Weil (2004): instead of looking for a loan to finance their vacancy costs, firms borrow to cover a fixed cost of hiring required to convert a match into a hire. This timing allows labor market efficiency to drop following a productivity shock. I build a monthly index of loan approval and conduct an empirical exercise that confirms the relevance of the credit channel.

▫ Frictional cash management

Joint with Sebastien Lotz and Cathy Zhang
We combine a theory of financial intermediation with a theory of households' money demand to provide microfoundations for portfolio-adjustment costs in Baumol-like models.

We develop a dynamic general equilibrium model to study the role of banks in creating and reallocating liquidity and households’ cash management. Our approach combines a theory of financial intermediation where banks swap assets with different liquidity properties with a micro-founded model of households’ money demand. Households and banks negotiate the terms of the contract in an over-the-counter market which includes an exchange of illiquid assets for liquid bank liabilities and an endogenous transaction cost for cash management. We show how the agenda of the negotiation matters and discuss implications for monetary policy transmission through money growth, open market operations, and quantitative easing on interest spreads between liquid and illiquid assets, asset holdings, and transaction costs.